Prepaying a car loan can offer significant financial benefits, such as reducing the overall interest burden and closing the loan sooner. However, it's essential to understand the associated charges and conditions. Being aware of the prepayment criteria and fees helps in making informed decisions, ensuring that the advantages outweigh any potential costs. This guide will provide detailed insights into part prepayment charges and important considerations before pre-closing your car loan.
What is car loan part prepayment charges?
When it comes to repaying your car loan early, part prepayment can be a strategic option. This involves making additional payments towards the loan principal, thereby reducing the outstanding balance and the interest payable over the loan tenure. However, lenders may impose part prepayment charges to compensate for the loss of interest income.
Understanding these charges is crucial for effectively managing your finances. For instance, loans with a seasoning period of up to 24 months may incur a charge of 3% plus GST on the part prepayment amount. Conversely, loans seasoned for over 24 months typically do not attract any part prepayment charges. Knowing these details can help you plan your prepayments better and avoid unnecessary costs. You can explore more about part-payment here.
Part prepayment charges for car loans
Criteria |
Details |
Eligibility |
No minimum seasoning required to initiate part payment. |
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Part prepayment allowed for all customer profiles (Individual, Non-individual, Salaried, Self-employed, etc.). |
Part Prepayment Charges |
3% plus GST for loans with seasoning up to 24 months. |
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Nil for loans with seasoning above 24 months. |
Other Terms & Conditions |
Minimum part prepayment amount is equivalent to one EMI. |
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No maximum part prepayment amount. |
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No maximum number of part prepayments. |
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No minimum gaps in part prepayments. |
Procedure for prepaying your car loan
Check the loan agreement
- Review the terms and conditions of your car loan agreement to understand prepayment terms.
- Ensure you are aware of any prepayment penalties or charges, if applicable.
- Confirm the minimum or maximum amounts you can prepay, as some lenders may impose restrictions.
Gather necessary documents
- Collect key documents such as your loan account statement, identification proof, and loan agreement.
- Verify your loan details, including outstanding principal, applicable interest, and tenure.
Contact your lender
- Reach out to your lender via phone, email, or by visiting a branch to inform them about your intention to prepay.
- Request information on the exact outstanding amount and any additional charges associated with prepayment.
Choose the prepayment method
- Decide whether you want to make a full prepayment (pay off the entire loan) or part prepayment (pay a portion of the outstanding amount).
- Full prepayment will close the loan entirely, while part prepayment reduces the outstanding balance and interest burden.
Make the payment
- Transfer the prepayment amount through a suitable payment method such as online banking, cheque, or NEFT/RTGS transfer.
- Ensure that the amount is credited to your loan account by the agreed date.
Get a payment receipt
- After the payment is made, request a receipt or payment confirmation from your lender for future reference.
- This serves as proof of prepayment and can be useful if discrepancies arise later.
Request a loan closure/ Amortisation statement
- If you’ve made a full prepayment, request a loan closure statement that indicates the loan has been fully repaid.
- In case of part prepayment, ask for a revised amortisation schedule to reflect the new EMIs and tenure.
Update your credit report
After the prepayment, monitor your credit report to ensure that your lender updates the loan status accurately.
Tips to minimise car loan prepayment charges
Review the loan agreement
- Before taking a car loan, carefully review the terms regarding prepayment charges.
- Some lenders may offer loans with no or reduced prepayment penalties after a certain period, so select a lender with favourable prepayment terms.
Opt for loans with flexible prepayment terms
- Choose a car loan that allows flexibility in making prepayments, such as no penalty after a certain tenure or low charges for part payments.
- Some lenders may have special offers for loans that enable prepayment without any charges.
Prepay after the lock-in period
- Many lenders impose prepayment penalties during the initial phase of the loan tenure, often the first 12 to 24 months.
- Wait until the lock-in period ends to prepay, as the charges may reduce or become nil after this time.
Negotiate prepayment terms
- If possible, negotiate prepayment terms with your lender at the time of taking the loan.
- Lenders may sometimes waive or lower prepayment charges based on your credit profile or banking relationship.
Utilise surplus income for part prepayments
- Consider making part prepayments instead of a full prepayment to reduce your loan balance progressively.
- Some lenders allow part prepayments with minimal or no charges, helping you reduce interest costs without facing hefty penalties.
Make prepayments strategically
- Time your prepayments during periods when the lender offers promotions or discounts on prepayment charges.
- Keep track of your lender’s offers, especially during festivals or special banking events.
Choose shorter loan tenures
- Opt for a shorter loan tenure initially to reduce the need for prepayment altogether.
- This helps you avoid higher interest accumulation over a longer period, making prepayment less necessary.
Use bonus or windfall income
Use unexpected income, such as bonuses or tax refunds, to prepay smaller amounts consistently rather than making a large lump-sum payment that could incur higher penalties.
Important points to consider before pre-closing your car loan
Pre-closing your car loan, or fully repaying the outstanding loan amount before the end of the tenure, can provide financial relief and eliminate monthly EMI obligations. However, it is essential to consider several factors before proceeding with pre-closure.
Firstly, review your loan agreement for any pre-closure charges, as these can vary between lenders. Some institutions may impose a fee to compensate for the loss of future interest. Additionally, ensure that you have sufficient funds to cover the lump-sum payment without affecting your financial stability.
Secondly, consider the potential savings on interest. Calculating the total interest saved by pre-closing the loan can help determine if the benefits outweigh the pre-closure charges. Lastly, it's important to confirm any administrative requirements with your lender to ensure a smooth pre-closure process.
To effectively manage your finances and avoid additional costs, planning to pay in advance can be beneficial.
